WTO puts farm program on defensive

Elton Robinson | Feb 22, 2006

TUNICA, Miss. -- If the United States doesn’t significantly cut back its domestic farm support, one group that could cry foul is U.S. pharmaceutical companies. Strange as that may sound, it’s just one of several factors working against U.S. farm support programs, noted Kenneth Roberts, associate administrator for the Foreign Agricultural Service, Washington, D.C., and a U.S. trade negotiator.

“We’re on the defensive with our domestic support,” Roberts told attendees of the National Conservation Systems Cotton and Rice Conference, in Tunica. “The 1996 farm bill was a market-oriented approach that was clear under WTO rules. But the 2002 farm bill made permanent some of the safety nets we had earlier. That has made it difficult for us.”

Roberts said WTO negotiators are dividing domestic support into three bands. “The top band will include the European Union, which has the greatest amount of support. The middle band will include Japan and the United States, and the bottom band would include everybody else.”

Roberts said a coefficient will be applied to the amount of support in each band. “For example, in the top band, we might see a total reduction of 75 percent to 83 percent and 40 percent to 60 percent in the middle band.”

Roberts said U.S. agriculture could have a tougher time making changes than Europe or Japan. “During the time we’ve been increasing our domestic spending on agriculture, Japan has been changing the way they do theirs. They find themselves in a more comfortable position of being able to take the cuts. The European Union system is increasingly going to green support because there is a lot of pressure to discontinue spending in the amber box, the most trade-distorting form of payment.”

As to the United States, “We’ll do everything we can to negotiate keeping as much of what we have in place as we can,” Roberts said. “But to get this deal, there is going to be tremendous pressure on us to agree to something less than what’s there, less trade-distorting subsidy.”

Roberts says to offset reduced payments, U.S. trade negotiators are “trying to open as many markets as we can. So if we have to make these reductions in farm payment support, we have some other way of generating income.”

Essentially this means finding a home for U.S. production surpluses, Roberts says. “The United States is proposing that all export subsidies be eliminated by 2010. We still have some unfinished business with state trading enterprises, where countries such as Australia, New Zealand and Canada have a special privilege to be the only supplier of that product. We want to break that link so that others can go into those markets, source material and create some competition.”

U.S. food aid programs are also being scrutinized, according to Roberts. “The Europeans would like to see us not give food aid, but provide cash instead. But we would rather not be forced to give all our food aid in dollars. There are a lot of instances where that only goes into corrupt hands.

“The Europeans are on the losing side of that argument. On the public relations side, if we illustrate to the world that when we go from giving a commodity to giving cash, donations drop by about 50 percent. There would be even more people starving to death.”

Roberts hopes that the United States can open additional export markets through CAFTA. “It’s a very important trade agreement. When you lower tariff protection, it benefits U.S. producers. We have an efficient infrastructure here. We have to have confidence that we can be competitive in this market.”

Brazil’s successful challenge of U.S. domestic and export subsidies is another driving force for change, noted Roberts. “It is a very significant ruling, and even though Brazil won, they’ve been remarkably restrained. They could be retaliating against U.S. agriculture, through the WTO, for a sum in excess of $2 billion.

Because there isn’t enough U.S. agricultural trade to Brazil to retaliate against or to raise tariffs, the issue “will spill over into other areas, such as pharmaceuticals, where we have a lot of intellectual property rights protections,” Roberts said. “That could cause a hell storm, because we’ve been working very hard to get them to recognize this type of protection.”

If the United States does not comply with the WTO panel report, “the next step is for Brazil to come down on us. They will do it in as painful a way as possible. As soon as there is a sense that the next Doha negotiation is collapsing, I expect they will go to the recourse that they have at their disposal. It would not be a good thing for cotton and a lot of other commodities.”

Roberts says the United States must show Brazil “that we have taken the results of the panel and actually changed something. This could include the repeal of Step 2 “and the lifting of the premium cap on our export credit program. The 1 percent fee isn’t always enough to reflect the degree of risk in some markets.

“We’re also trying to repeal the longer-term GSM-103 credit program. Those are the three elements we’re trying to implement to show a good faith to Brazilians that we take this seriously, without doing harm to our own farmers’ interests in the near term.”

At the same time, the United States is also attempting to show that the Export Credit Guarantee Program-GSM-102 managed by FAS “is not a subsidy, although the Organization for Economic Cooperation and Development determined that it was.”

GSM-102 and GSM-103 programs underwrite credit extended by the private banking sector in the United States to approved foreign banks, allowing the U.S. banks to offer competitive credit terms. The GSM-102 Export Credit Guarantee Program provides coverage for credit periods not to exceed three years. Sales under these programs are commercially financed; they are not food aid or subsidy programs. The GSM-103 Intermediate Export Credit Guarantee Program covers periods of more than three years, but not more than 10 years.

If the timeline to complete negotiations aren’t met by the end of April, “we could be pushed to the end of July, which isn’t a very good outcome.”

Rice producer L.G. Raun, Texas rice producer and chairman of the Texas Legislative Group, asked Roberts if negotiators “are looking at making any cuts commensurate with what they anticipate will be any price increase and market access gains for each commodity.”

“We are looking at that,” Roberts said. “We don’t want to be too specific because it gives away our negotiating position. But we have to know the relationship between the drop in revenue from support versus what we’re gaining on the export side. There’s a margin there, but it’s not one for one. When you get money from the government, it’s a dollar for a dollar. When you’re exporting a product, there may be a profit margin of 30 percent. You have to make that up.

“We can’t bring this deal back and say we didn’t do well on the market access side, but we’re going to have to do these 60 percent to 70 percent cuts in subsidies. That’s what makes this a tough test.”